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However, we continue to rely on the banks themselves for the essentials of business recovery-trade finance and working capital-as well as for continuing to contribute substantially to GDP and tax revenue. We must beware of creating a regulatory system that inhibits their ability to do so, that is pro-cyclical or enmeshes the banks in so much regulatory interaction that lending continues to shrink. We face plenty of uncertainty about the health of the financial sector and the pace of the recovery, not just for the next few months but for years of economic convalescence. Designing the right regulatory framework for this should surely be undertaken in a new Parliament with full consideration and care.

5.26 pm

Lord Bew: My Lords, I rise briefly to argue one point. The Bill is the appropriate legislative vehicle to extend the operation of the FSA to credit unions in Northern Ireland. I was greatly encouraged when I listened to the opening speech of the noble Lord, Lord Myners, to hear that one of his concerns was the broad spread throughout the population of financial competence. It is perfectly clear that the credit unions have been agents of good authority in this respect.

Noble Lords may not be aware that credit unions in Great Britain essentially engage only 1 per cent of the population. In Northern Ireland it is very different; they engage 26 per cent of the population. They play a significant role, in part, it might be said, because of the role that the Nobel laureate John Hume played in his youth in promoting credit unions. They operate as agents of stability in a society which, as all noble Lords know, at many points in the past 30 years has

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not been the most stable part of the United Kingdom. The credit unions of Northern Ireland are worthy of our benign intentions.

As matters stand, the credit unions in Northern Ireland can operate in only three main areas, namely share accounts, loans and life assurance. Credit unions in Great Britain operate in around a dozen areas: current accounts; internet and telephone banking; standing orders for payment of wages; ATMs; home, travel, health and car insurance; mortgages; debit cards; direct debits; bill payments; junior saving accounts; and child trust funds. Credit unions in the Republic of Ireland have a similarly wide-indeed, even wider-range of potential operation. The passport to credit unions in Northern Ireland having this wider range is for them to come under FSA regulation. In other words, I propose that, in the context of the Bill, it should be possible to remove the exemption in the Financial Services and Markets Act 2000, which prevents FSA regulation of Northern Irish credit unions.

When this matter was discussed in another place, the Minister, Mr Ian Pearson, who also had the benefit of having been a Northern Ireland Minister at an earlier stage of his career, expressed sympathy for this broad argument but noted that there were certain technical difficulties. I must concede that there are, not least to do with time. Mr Pearson noted that the Northern Ireland Assembly's legislative consent would have to be sought. The Bill asks already for the Northern Ireland legislative Assembly's consent to be sought in three other instances of practice that the Bill intends to institute. However, it does not at this point ask for legislative consent in this area. He also argued that there would be a difficulty in finding time for sufficient statutory public consultation on the credit union issue. It is normal in Northern Ireland to have a period of statutory consultation on an issue of this kind; that is entirely correct.

None the less, in recent weeks in the Grand Committee of this House, there have been several discussions about the operation of the public consultation in Northern Ireland. It has been revealed to be in certain cases remarkably perfunctory. There has been simply a notice on a website and perhaps one or two comments from interested parties. Certainly it would be possible to carry out a public consultation on this issue within a month, and there need be little fear as to what the public's reaction would be.

All parties in the Northern Ireland Assembly are agreed on the desirability of this change. It is quite unusual to get complete agreement across all parties in the Northern Ireland Assembly. I have to concede that there is usually one occasion when one can obtain such agreement-that is when one is proposing an extraction of cash from the UK Exchequer. Ever since the Financial Relations Committee in the 1890s, there has been a pattern whereby, on such occasions when people in Northern Ireland approach the Treasury, they put aside their differences.

However, in this case, the Treasury, in a paper published last year, also agreed that this plan was a desirable development. We are faced with something unusual-not only is there agreement among all the parties in the Northern Ireland Assembly but also the

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agreement of the Treasury in London. I should be very grateful if the Minister would consider, as the Minister in the other place said, if the Government receive-as in principle they should receive-encouragement from the Northern Ireland Assembly, asking the Assembly for legislative consent in this matter.

5.31 pm

Lord Goldsmith: My Lords, I intend to interrupt just for a few moments this enormously important debate on the philosophy of financial regulation and stability to pick up on one part of the Bill which has not attracted a great deal of attention so far, although both opening speakers referred to it-Clauses 18 to 25 on "Collective proceedings". I do that without apology, not because what has been discussed so far is not hugely important, because it is, but because, as my noble friend the Minister rightly said, these proposed provisions are groundbreaking. It is therefore right to spend a few minutes looking at them.

They are groundbreaking because they would provide for the first time in English law something which is akin to, although in important respects different from, a class action with which we are familiar in US proceedings. For the first time it will be possible in the most radical form of collective proceedings-opt-out proceedings-to have them brought on behalf of people who do not know that they are being represented and to bind them in the result or enable them to benefit from damages from proceedings about which they knew perhaps nothing and certainly took no part. The Bill would make provision to disapply limitation periods and make particular provisions about damages-for example, for the first time, by not requiring a careful assessment of loss before damages are awarded.

The provisions are groundbreaking in that sense and apply in this Bill only to claims in relation to financial services, but it follows a recommendation by the Civil Justice Council in relation to proceedings more generally. As we approach this part of the Bill, we need to recognise that it has an importance in relation to financial services, but it also has an importance as a potential precedent in the future for other civil proceedings.

I wish to make two points in this short intervention. First, I must declare my interest as a practising lawyer. There is another specific interest that I shall declare in a few moments which is relevant to the final point I want to make. The first question is: should we be welcoming this innovation? As a matter of principle, is this form of collective proceedings a good thing? This has been a matter of debate for a number of years-whether we should move more towards a class-action system. For myself, subject to the safeguards to which I want to return, I regard this as a good thing for us to attempt to do. That is because, frankly, it is very difficult for many people who suffer-and the financial services sector is one in which that has happened-effectively to bring proceedings whereby they can vindicate their rights and receive compensation. That is enormously difficult to do and, therefore, something which helps to provide that access to justice is very well worth considering.

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On the other hand, we have to recognise that there are excesses and abuses which many would see in the class-action system. I have to be careful about what I say, as I am now partner of a firm which is headquartered in New York and whose heritage is New York and US law. But there remain-and will remain-differences between our system and the US system which are important in protecting against abuse. First, we still, at least for the moment, apply a principle that the loser pays the costs. That means that there is a disincentive to bring bad proceedings. Secondly, we do not have a principle of triple damages, which can often increase enormously the damages which result. We do not in civil cases, with very few exceptions, allow juries to assess damages-that is another cause of high damages awards in United States cases.

However-this leads me to my second point-a lot of the questions about whether the safeguards will be there and abuses prevented depend upon the detail of these proposals. Here there is a difficulty: it is intended, for reasons which I understand and with which I am familiar, that a lot of the detail will be contained either in regulations or rules of court. At least in one case it is not entirely clear whether the same matter could be prescribed in both, because it appears that the identification of cases for collective actions could be both prescribed and the criteria for them set in rules of court. There seems to be an overlap. If my noble friend the Minister will forgive me, I also have some concern that it is intended that the regulations will in due course be made by the Treasury, which, as a former spending Minister, I enormously admire, but it is not the place where the greatest repository of knowledge about legal proceedings lies. I hope therefore that he will say something about how in practice those ministries which have that expertise will be involved in the regulations-for example, the Ministry of Justice.

Many details will need to be prescribed or set out in rules of court. Just what are the criteria for deciding which cases are fit to be collective proceedings? Which are fit to be opt-in and which are fit to be opt-out proceedings? When are limitation periods to be excluded? How are damages to be dealt with? These are important questions to which great attention needs to be paid. Our difficulty in this case is that not only are the criteria not in the Bill, which I entirely understand, but we face the difficulty of an accelerated period in which this legislation has to reach the statute book. I personally hope that this part will reach the statute book. In those circumstances, can the Minister reassure us that a way will be found for some of the important detail of this matter to be debated without the normal process of having to draw it out of him through probing amendments in Committee, so that by the time that the legislation is finished-probably in wash-up-we will have a much better idea of what the draft regulations will be? That is a concern.

I want finally to pick up on an issue referred to in Clause 23(5)(b)-the possibility that in opt-out proceedings there will be a sum of money left which is not, at the end of the day, distributed. The Civil Justice Council recognised that if there are to be proceedings in which people are represented but not

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actually taking part, you may well end up with a sum of damages awarded for which there is no recipient. The proposal is that provision should be made in regulation as to the purposes for which that money is applied, including "charitable or other purposes". In his masterful and detailed report on costs, Lord Justice Jackson touched on this point, making what he described as a modest proposal that a potential recipient of this money is the Access to Justice Foundation. Here I make my second declaration; I am the chairman of the board of trustees of that foundation, which was established for the purpose of receiving money, awarded by the court, under Section 194 of the Legal Services Act 2007. The foundation was established by the professions and by the pro bono and legal advice industries. I therefore simply note that declaration of interest, but we as a House, when we are asked for the first time to approve a situation in which a defendant may be ordered to pay money that will not actually go to the people who have suffered the loss, will want to know the intended destination of the surplus money.

5.39 pm

Lord Howard of Rising: My Lords, even as your Lordships debate this Bill, a worrying number of corporations are considering leaving this country and moving their business abroad-half the FTSE top 30 companies, if one is to believe the press. Taxation and the increasing costs of complying with endless streams of regulation are forcing even the most patriotic and loyal of companies to reconsider whether they can afford to stay in this country and remain competitive in today's world markets. As if there were not enough difficulties already, the Bill in front of us today will create further reasons for financial institutions to take their business elsewhere.

The Bill responds to the financial crisis, but it perpetuates the very tripartite system which so significantly managed to avoid spotting the banking crisis. A fish cannot swim with two heads, let alone three. This system demonstrated that, with responsibility divided, the ability to identify and cope with problems is significantly reduced. At the same time as proposing to continue with a system which has proved its incompetence, the Bill introduces a series of measures which will have the effect of accelerating the rush for the exit from these shores.

There has been much talk of the billions of pounds of taxpayers' money which has had to be used to bail out the banks, but those billions were required because the parameters within which banks operate, and for which Government are responsible, were inadequate. Bankers go into business to make money. It is up to Government to make sure that, as bankers pursue this goal, the urge is harnessed and kept in sensible bounds so that it can continue to be a creative force within the economy, without becoming a problem. However, the responsibility for monitoring the financial sector was removed from the organisation which had the knowledge and experience to handle the matter: the Bank of England; and given to a novice, the FSA. Sadly, this is not the only example where this Government's obsession with discarding the collective memory in favour of something shiny and new has ended in tears.

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It is worth pausing for a moment to put the billions used to bail out the financial sector into perspective. In the current climate, it is all too easy to forget that the financial sector has itself been a very significant contributor to the economy and to the Exchequer. During the financial year to 31 March 2009, the total tax contribution from the financial sector, as assessed by PricewaterhouseCoopers, was £61.4 billion, or 12.1 per cent of total government tax receipts-not as high as previous years, but still a very meaningful contribution. If one does an extrapolation of the PricewaterhouseCoopers calculations for this and previous years, one comes to a total tax contribution since 1997 of about £700 billion. The numbers are not precise but, although approximate, they are sufficiently accurate to make the point that the financial sector is an immense contributor to the economic prosperity of this country-something to be preserved and looked after.

The other side of the balance sheet is the Government's total net contribution to the rescue package. This is a complicated calculation which involves many assumptions, but rather than send you to sleep by going through all the figures, I will just say that a perfectly reasonable estimate is that the maximum eventual cost to the taxpayer is unlikely to be more than £10 billion. If this seems low, in view of some of the numbers which have been bandied about, I would point out that the last PBR revised the estimate of losses from financial intervention from between £20 billion and £50 billion to £8 billion.

All in all, the Exchequer is hugely in profit. Any sane person would be grateful, and ask themselves what the fundamental and underlying causes of the banking crisis were. They would also ask how the basic parameters within which financial institutions operate could be changed, if not to totally prevent then at least to significantly reduce the harmful effects of a downswing, while maintaining the benefits of a strong banking sector-in spite of claims to have abolished boom and bust, it is not possible to eliminate cycles.

Instead of examining the basic structure, the Government intend to compound their errors by continuing the failed tripartite system and giving increased power to the FSA. This organisation appears to be wedded to control of the minutiae and the detail, rather than endeavouring to establish the principles required to achieve the type of robust framework within which financial institutions can be left to get on with their business without causing harm to the rest of the economy.

In spite of public comment warning of perils ahead, the FSA ignored all the signs of an impending financial crisis-overgearing, dubious assets, over-complex financial instruments, and so on and so forth. Instead, it built up a massive overhead. With precious little outside discipline and controls over the tax it levies on those it regulates, the FSA continues to increase in size, as if the number of employees was a substitute for joined-up thinking. In its business plan for 2009-10, it anticipates staffing levels of 3,000. To put that in perspective, the Treasury's latest report projects core Treasury staffing levels in March 2010 of 1,386-less than half the FSA.

What have all these people been doing for the FSA, if not identifying underlying and serious potential problems? They were creating red tape and issuing

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fines: over £100 million worth, much of which where no harm had been done and the offending organisations themselves had identified the fault. In an earlier debate, I asked whether the £14 million of bonuses paid to FSA employees last year were related to the level of fines. I was assured that that was not so, but it took five months to extract from the FSA how it calculates bonuses. What would have happened to an organisation overseen by the FSA if it had taken so long to respond?

It is now proposed to give the FSA massive new powers, among them the power to control salaries and bonuses. If Her Majesty's Government are a significant shareholder, depositor or provider of funds in a bank or a business, they have every right-even more, a duty-to consider how much those employed are paid. However, in a free society government should not be interfering with arrangements between private citizens. The red herring is raised about the level of bonuses, and how they take money away from shareholders and prevent the building up of necessary reserves so that the Government are forced to provide assistance, but, with the odd exception, bonuses are paid from profits, generated by the person receiving the bonus. External control over the pay structure will only drive the wealth creators to go elsewhere.

John Varley and Bob Diamond of Barclays Bank have led the way in waiving their bonuses. Others have followed. But for how long will this go on when, by moving to a friendlier location, the individuals would be so much better off? If people are prepared to waive remuneration one year, will they be prepared to do so in successive years? In today's world, there is no compulsion to stay in the City of London: it may be more convenient, but it is no longer essential.

It is all very well for the Minister to complain in the press that while bankers took home billions in bonuses, the owners of bank shares over the past decade have had a return of zero. Compared to the returns under the Labour Government, that is wealth beyond the dreams of avarice. Records show that since the Prime Minister's first proper Budget in 1998, sterling has lost value against almost every major currency; the stock market is down; our budget deficit is worse than that of Greece; we are borrowing nearly £200 billion a year-that is, if we can continue to do so without printing the money-unemployment has increased; provision of pensions has been seriously damaged; and gold has been sold at less than a third of today's price, losing about £6 billion.

The FSA will be given the power to impose unlimited fines. If a final push were needed to make those dithering rush for the exit, that will certainly provide it. Why would one want to do business where an unlimited liability hangs over one's head for what could be an unintended error, and where the track record of the institution with the power to impose a fine shows that when it comes to penalties, it has an extremely itchy trigger finger? The FSA should be abolished rather than being given increased powers. It has a culture incompatible with being a public body. Not only does it consider itself to be better than others; there is a continual stream of statements from senior executives stating how the organisation should

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be feared and disliked. One cannot expect fair and impartial treatment from an organisation whose chief executive says:

"There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA".

It is shameful that the head of an organisation acting on behalf of Her Majesty's Government as policeman, judge, jury and executioner should make such a remark. It shows the attitude of a bully, and is not worthy of the fine traditions of public service in this country. Financial markets should be governed by establishing clear and easily understood principles, rather than by attempting detailed controls over day-to-day activities that will inevitably fail.

5.53 pm

Lord Barnett: My Lords, the Bill gives great new powers to the FSA and strengthens it considerably. The case has been made today by the noble Lords, Lord Henley and Lord Howard, and very strongly by the noble Lord, Lord Lawson, for abolishing the FSA and transferring the powers to the Bank of England. It is not a party political issue: it is an issue of what is the right thing to do.

I will quote some of the things that have been said elsewhere. Hector Sants, the current chief executive of the FSA, who has an obvious interest, was quoted recently as saying that this would return regulation "to the dark ages". I hope that the noble Lord, Lord Turner of Ecchinswell, who is not here, will forgive me for quoting him. He was originally an agnostic, but said in an interview with Bloomberg Television in Davos, a very popular place these days, that,

He said last year that he was agnostic about the Conservative plans to axe the regulator and beef up the powers and responsibilities of the Bank of England; but he is opposed to it now, in current circumstances.

Well, everybody can change their mind and he has changed his. For my part, I could accept the case in principle. After all, the FSA has failed appallingly in the regulation for which it was responsible, so it is not difficult to recommend its abolition. On the other hand, although in principle I would have no objection, in current circumstances-with great respect in particular to the noble Lord, Lord Lawson-the case has not been well made. The fact is-

Lord Lawson of Blaby: In fact, I did not refer to that at all in this debate. It is not surprising that the case was not well made, because I did not touch on the issue.

Lord Barnett: The noble Lord and I have debated at length on many occasions, in particular in another place, and I do not propose, given the shortage of time, to have a major debate with him now. As I said, in principle I would not object; but all that would happen would be that most of the staff of the FSA would be transferred to the Bank of England. I doubt that anybody has denied that, and I doubt that regulation would necessarily work better in those circumstances than it has done in recent times.

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